The recent explosion of home foreclosures has cast a spotlight on the dubious practice of granting subprime mortgages to people who could not afford them. In addition to the subprime crisis, a greater light is being cast upon the entire industry that often seeks to make money off of people who are poor. This industry was the recent focus of a
report on the Bill Moyers Journal on PBS. Moyers and his colleagues, with the help of Business Week, examined the practices of the used car company, JD Byrider. Used cars are often sold to lower income buyers at interest rates that make it impossible for the buyer to keep the car. In fact, JD Byrider has it down to a formula. As the
article in Business Week points out:
"Byrider dealers say they can generally figure out which customers will pay back their loans. Salesmen, many of whom come from positions at banks and other lending companies, use proprietary software called Automated Risk Evaluator (ARE) to assess customers' financial vital signs, ranging from credit scores from major credit agencies to amounts spent on alimony and cigarettes.Unlike traditional dealers, Byrider doesn't post prices—which average $10,200 at company-owned showrooms—directly on its cars. Salesmen, after consulting ARE, calculate the maximum that a person can afford to pay, and only then set the total price, down payment, and interest rate. Byrider calls this process fair and accurate; critics call it "opportunity pricing." JD Byrider and the used car industry are not alone in turning a profit off of those who are struggling to make ends meet; criticism has also been leveled at the payday loan industry. This industry is designed to give people a short-term loan that is often intended to cover the borrower’s expenses until the borrower’s next payday. Loans are often due in a two week time period and (depending on the state) can carry an interest rate up to close to 400%. In a recent
study, The Center for Responsible Lending reveals that:
“Despite attempts to reform payday lending, now an industry exceeding $28 billion a year, lenders still collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.”
Also in the report, which you can download
here, it is found that:
- 90 % of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from the 2003 findings.
- The typical borrower pays back $793 for a $325 loan.
- Predatory payday lending now costs American families $4.2 billion per year in excessive fees. - States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.The majority of the money that is made in this industry is from borrowers who cannot pay back their initial loan and then take out another loan on top of the existing. This quickly leads to a cycle of debt from which it is often very tough to escape, especially considering the initial financial status of the borrower. This cycle of debt led to a total cost of $209 million to Ohio families according to the 2005 study by the Center for Responsible Lending. Lawmakers within Ohio realized that there was a problem and worked to pass
Ohio H.B. 545.
Gov. Ted Strickland signed this bill into law on June 3rd of this year which caps the maximum interest rate that can be charged by payday loan companies, at 28%. While 28% still may seem like a high figure, it is quite a drastic change from the previous 391% that could be charged before the law was passed. The law would also limit how many loans individuals could take out at a time. Some institutions feel that such regulations on the payday loan industry are inappropriate in a so-called free-market society. A group called Ohioans for Financial Freedom has started circulating a petition to gather signatures in order to repeal Section 3 of Ohio H.B. 545. This group has also started a television campaign in which they are running the following ad:
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